The Best Decentralized Exchanges (DEX)

By  Beluga Research October 12, 2023

A decentralized exchange (DEX) is like a financial playground without a referee, where traders have full control, no middlemen and the rules are enforced by code rather than institutions. Read More

Image for The Best Decentralized Exchanges (DEX)

The Beluga Top Pick — Uniswap

Uniswap Logo

Top Pick

Uniswap

Native Governance Token

$UNI

Chains

6 Chains (Ethereum, Avalanche, etc)

Fees

.05%

Runner Up — SushiSwap

SushiSwap Logo

SushiSwap

Native Governance Token

$SUSHI

Chains

25 Chains (Ethereum, Polygon, etc)

Fees

.3%

Curve Finance

Curve Finance Logo

Curve Finance

Native Governance Token

$CRV

Chains

10 Chains (Ethereum, Celo, etc)

Fees

.04%

1inch

1inch Logo

1inch

Native Governance Token

$1inch

Chains

10 Chains (Ethereum, zkSync, etc)

Fees

0.2%-0.3%

Questions & Answers

Q. How Do DEXs Work?

A. DEXs operate and provide:

  • Peer-to-Peer Trading: DEXs facilitate direct, peer-to-peer cryptocurrency trading, eliminating the need for intermediaries like centralized exchanges.
  • No Central Authority: DEXs operate without a central authority, relying on blockchain technology and smart contracts to automate and secure transactions.
  • User Wallets: Users connect their cryptocurrency wallets to the DEX, allowing them to control their funds and execute trades directly.
  • Order Book or AMM: DEXs either use order books (matching buyers and sellers) or automated market makers (AMMs) to enable trades.
  • Smart Contracts: Trades are executed through smart contracts, which automatically process and settle transactions according to predefined rules.
  • Decentralized Liquidity: DEXs rely on user-contributed liquidity pools, where traders can swap their assets, and liquidity providers earn fees for their contributions.
  • Reduced Custodial Risk: Since users retain control of their assets in their wallets, the risk of hacks or security breaches like at a central exchange is minimized.
  • Transparency: Transactions on DEXs are recorded on a public blockchain, providing transparency and verifiability.
  • Anonymity: Users can trade on DEXs with a degree of anonymity, as they do not need to undergo the same level of Know Your Customer (KYC) procedures as on centralized exchanges.
  • Cross-Chain Trading: Some DEXs support cross-chain trading, allowing users to trade assets from different blockchains without the need for a centralized intermediary.
  • Token Compatibility: DEXs typically support a wide range of tokens, including popular cryptocurrencies, stablecoins and less common tokens.
  • Lower Trading Fees: DEXs often have lower trading fees compared to centralized exchanges, as they do not require the same infrastructure and costs from intermediaries.
  • Global Access: DEXs are accessible to users worldwide, offering a more inclusive way to trade cryptocurrencies.
  • Security Emphasis: Security is paramount in DEXs, as vulnerabilities in smart contracts or the underlying blockchain can lead to exploitations and losses.
  • Front-End Interfaces: Users interact with DEXs through web interfaces or dedicated apps that connect to the underlying blockchain.

Q. What are the different types of Decentralized Exchanges:

A. There are different types of decentralized exchanges that operate on various blockchain networks and employ different mechanisms for facilitating decentralized trading. Here are some common types of DEX platforms:

  • Central Limit Order Book (CLOB): These function similarly to traditional centralized exchanges by using order books to match buy and sell orders. They allow users to create limit orders and specify their desired price and quantity. While the CLOB structure was popular with early DEX versions, advancements have largely been focused on the AMM model. Examples include dYdX and IDEX.
  • Automated Market Maker (AMM). An AMM DEX utilizes liquidity pools and algorithms instead of order books to facilitate trading. Liquidity providers deposit their funds into pools, and trades are executed based on pre-set mathematical formulas. Uniswap and PancakeSwap are popular AMM DEX platforms.
  • Hybrid. A Hybrid DEX takes parts of both AMMs and CLOBs to make a sum that is greater than the parts. For example, an AMM DEX can implement an order book to make cross chain swaps possible. There has also been a recent surge in popularity for Central Limit Order Book infrastructure protocols such as Sei Network upon which a DEX could launch, furthering the possibilities of DEX performance.

Q. How Can I Get Started With a DEX?

A. Here are the steps for when a trader is ready to jump in:

  • Set up a digital wallet that is compatible with the blockchain network on which the DEX operates. Popular options include MetaMask, Trust Wallet or Ledger Live.
  • Obtain the desired cryptocurrencies to trade on the DEX. They can be purchased from a centralized exchange, using a peer-to-peer trading platform or transfer them from another wallet. Make sure the cryptocurrencies are compatible with the targeted or planned DEX.
  • Explore different DEX platforms and consider factors such as security, supported cryptocurrencies, liquidity, fees, user interface and reputation by โ€ฆ using the guidance in this article for one. Ensure the DEX of choice is compatible with the digital wallet and the cryptocurrencies held.
  • Connect the digital wallet to the selected DEX through the DEX's site, executing the connection following their specific instructions.
  • Transfer the desired cryptocurrencies from the wallet to the DEX. This involves initiating a cryptocurrency transfer from the connected wallet to the DEX's designated wallet address.
  • Execute trades - with the wallet connected and funded, traders can then engage in trades on the DEX. Select the trading pair to be traded, enter the desired amount and price, then submit the transaction. Transactions on DEXs are typically executed directly on the blockchain through smart contracts.
  • Confirm and track the transaction(s) details on the wallet interface.
  • Manage the assets in the personal wallet which will reflect the updated balance of traded assets. Traders can choose to hold the assets in their wallet or transfer them back to another wallet for long-term storage.

Q. Will I Pay Taxes for Transacting on my Chosen DEX?

A. Tax regulations regarding decentralized exchanges and cryptocurrency transactions vary by jurisdiction, and it's essential to consult with a tax professional or become familiar with the specific tax laws in a specific country.

General considerations regarding taxes when using a DEX may include: Capital gains, reporting obligations, airdrops, forks, rewards, lottery winnings and promotional rewards, to name a few. It's crucial to maintain accurate records of all DEX transactions, including purchase prices, sale prices and the specific tokens involved. Keeping track of this information can help accurately calculate all gains or losses and in order to fulfill tax reporting obligations. Refer to Beluga's article on Crypto Tax Software to find comprehensive support on the issue

It's worth emphasizing - due to the complexities and evolving nature of cryptocurrency taxation, it's highly recommended to consult with a tax professional who specializes in cryptocurrencies and understands the regulations in a specific country.

Q. Does the IRS (in the US) Get the Reports of Decentralized Exchanges?

A. Traders interact with decentralized exchanges through non-custodial wallets. Normally, these wallets do not report to the IRS as opposed to centralized exchanges that do report.

Q. Is There a DEX That Does Not Charge Transaction Fees?

A. Every DEX has a fee for facilitating users' transactions and trades. However, some DEX platforms may give users discounts when using certain liquidity pools. Generally, the transaction fees for a DEX is much lower than those for CEXs. Some charge as low as 0.04%.

Q. Which DEX is Best for Beginners?

A. The best DEXs for beginners are Uniswap and PancakeSwap. These decentralized exchanges have simple user interfaces and designs, making them easy for beginners.

Q. Which Decentralized Exchange is the Cheapest?

A. Technically speaking, 1inch, the DEX price aggregator is the cheapest. It can help crypto traders find the best prices for assets and lowest fees for trades by running through all the DEXs on the DeFi ecosystem.

Q. Are Decentralized Exchanges Legal?

A. DEX platforms operate in a legal gray area in many jurisdictions, as the regulatory landscape surrounding cryptocurrencies and decentralized finance (DeFi) is still evolving. The legality of a DEX depends on various factors, including the specific jurisdiction and the activities conducted on the platform.

It's important to note that while DEXs themselves may not be inherently illegal, the activities conducted on them, such as trading illegal or prohibited assets, can be illegal and subject to enforcement actions.

As regulations continue to develop, governments and regulatory bodies are paying more attention to decentralized exchanges and taking steps to establish frameworks for their operation. It is advisable to stay informed about the legal and regulatory requirements in a specific jurisdiction and consult with legal professionals for accurate and up-to-date information.

Q. Are Decentralized Exchanges Safe to Use?

A. Decentralized exchanges offer certain safety advantages, but it's important to be aware of potential risks.

A DEX provides a safe option for users to retain control of their funds, eliminating the counterparty risks that were seen with centralized entities like FTX and Celsius. Also, safety is enhanced as transactions on a DEX are recorded on the blockchain, providing a transparent and immutable transaction history. Maybe best of all, there is also no single point of failure - a DEX is decentralized, meaning there is no central point of vulnerability that can be targeted by hackers.

Risks involve the reliance on smart contracts. Vulnerabilities in these contracts can be exploited by malicious actors. Users should exercise caution and do proper research before interacting with any DEX platform. A DEX also operates in a less regulated environment compared to centralized exchanges. While this can provide freedom, it also means less protection and recourse if something goes wrong. Lastly, there is the possibility of user error. As users retain control of their funds, mistakes in handling wallets, private keys or transactions can result in loss of funds. It's important to follow security best practices and exercise caution.

It cannot be emphasized enough - of utmost importance is ensuring the safe keeping of one's private keys and seed phrases.